Economists in a twist over rate rise prediction

Strong retail trade and building approvals figures released this week may have increased chances of another interest rate rise this year, perhaps even two rate hikes – depending on which economist you talk to.

Stronger-than-expected data released by the Australia Bureau of Statistics (ABS) on Tuesday revealed that retail sales increased 0.7% in July, up to $20.4bn seasonally adjusted. This was almost double the forecast of 0.4%.

At the same time, Australian building approvals increased 2.3% in July – significantly higher than the anticipated decline of 0.7% – and 11% in the twelve months to July.

Senior economist Adam Carr from ICAP Australia describes the data as “extraordinary”, commenting that the strong building approvals figures “suggests that developers haven’t given up on the Aussie housing market – and it’s no wonder, when we’re still seeing house price growth just under 10% year on year.”

“Somehow, I don’t quite think we’ll be getting that rate cut [that] markets are looking for this year – currently priced in at 57%,” he says.

“Indeed, I think it’s highly unlikely that we’ll get through this year without another rate hike. I’m forecasting two 25bps hikes in both November and December.”

However, not all economists agree that the figures point to a definite rate increases before Christmas.

JP Morgan economist Helen Kevans believes the retail figures were strong due to a rise in consumer confidence, but says the Reserve Bank (RBA) would be more concerned about the overseas economy.

"Consumers are proving pretty resilient and the big gain in retail sales in July were in areas of discretionary spending, cafes and restaurants and other areas of retailing, so that's definitely good news," Kevans told AAP reporters.

"[But] at this stage, given the heightened concerns over the outlook for the global recovery, I think the RBA would be [more anxious about] the threat of a double dip recession."

Meanwhile, Commonwealth Bank economist James McIntyre predicts that the RBA “is probably going to be on hold to around November."

Regardless of when interest rates move north – which virtually all economists agree will happen within the next 12 months – Carr says these latest figures paint a positive picture for the Australian economy, and particularly for property owners.

“This is extraordinary data, highlighting that the Australian economy is on a very strong footing,” he says.

“Following a period of comparative rate stability, we’ll likely see a turnaround in lending growth in coming months and I suspect we will continue to see a decent rebound in activity [in the property market].”

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